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Ryan Avent says some things he probably considers uncontroversial, because he says so:

That’s because there are relatively uncontroversial ways in which high levels of government debt can and do affect growth. Government borrowing can crowd out private investment, induce uncomfortably high levels of inflation, and create a need for distortionary taxation.

I’m going to go ahead and say – some of this is at least somewhat controversial! A bold stance, indeed.

Let’s say the government wants to spend some money. The government can choose to finance it in two ways:

1) It can raise taxes.
2) It can borrow.

Obviously. But what does that mean?

In the first scenario, the government identifies a place where there is some money and takes it. It’s good to be the king.

In the second scenario, the government makes an offer – anyone who wants to patriotically volunteer their money to the government will get a series of small reward payments for many years, followed by the eventual full refund of their nominal volunteered sum.

Either way, the government has withdrawn an equal amount of money from society. The primary difference, it seems to me, is two-fold:

1) The money comes from different places.

2) In the latter scenario the government has obligated itself to future payments.

Item 1) is what’s usually paraphrased as "crowding out investment" – the presumption that money borrowed would have been put to use in ways that engender long-term growth, whereas money taxes would have come from mere "consumption." Regular readers (if you exist, that is) know I am not a fan of the saving/consuming dichotomy, but I am willing to indulge the idea that resources withdrawn by the private economy by government borrowing are systematically different than those withdrawn by government taxation. Let’s come back to this.

Can government borrowing "induce uncomfortably high levels of inflation?" Not if the Fed says it can’t! And the Fed has been pretty good at keeping inflation limited since the Volcker era.

Can government borrowing "create a need for distortionary taxation?" Sure! But so does taxing the money in the first place. If the government spends money and funds it all through taxes, there will be a lot of deadweight loss. If it funds at least some of it through borrowing, there will be presumably less deadweight loss since the money was coughed up voluntarily.

But look – here’s the data

Here’s real federal debt held by the public v. real federal interest payments since 1970:

Inline image 3

So, not a terribly correlated series.If you’re the naturally loggish type:

Inline image 4

Which shows a more correlated series at least during the 70s and 80s but note that starting in 1985 while the debt begins to rise and rise the total interest payments mostly stall out.

So, given the large increase in public federal debt over the last 30 years, we have seen decreased inflation, stagnant real interest payments (which means shrinking real interest payments as a share of GDP) and…so where’s the "crowding out?"

Any discussion of these issues without talking about the financial system, the central bank, the status quo ante of the macroeconomy, etc, isn’t very useful.


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